Ask Kim
Improve Your Credit Score
By Kimberly Lankford, Contributing Editor, Kiplinger's Personal Finance
September 4, 2002
According to Fair, Isaac, the company that developed the scoring system, you're among the bottom fifth of borrowers. It breaks down like this: People with credit scores of 780 and above are in the top 20%; then come those with scores from 745 to 780; 690 to 745 represents the third quintile; 620 to 690 the fourth; and below 620 the fifth.
You'll usually need a score of 700 or above to get a lender's best rates, but even returning to your old level could still make a big difference in your interest rates. Although each lender has different cutoffs for its specific rates, Fair, Isaac's Web site lists the average rates you may expect for each score range. A few points can make a big difference in your interest rate. Rates for 30-year fixed-rate mortgages, for example, average 6.145% for scores of 720 to 850; 6.271% for scores of 700 to 719; 6.808 for scores of 675-699; 7.958% for scores of 620-674; 8.662% for scores of 560-619; and 9.204 for scores of 500-599. For more details about the assumptions made for these rates, see About These Rates. The site also includes a Loan Savings Calculator, which shows how much money you can save in interest by improving your score.
Credit scores are based on information from your credit report. The most important factor (accounting for 35% of your score) is your payment history, followed by 30% for the amounts you owe, 15% for the length of your credit history, 10% for new credit and 10% for the types of credit you have. The best thing you can do to raise your score is to pay your bills on time. Keeping your balances low and not opening too many new accounts at the same time can make a big difference, too. Ask your lender what you can do to improve -- when Fair, Isaac provides lenders with your score, it also gives them up to four reasons why it isn't higher.